Even if your employer doesn’t match your contributions to your 401(k) plan, contributing to your retirement plan is still a great financial move. The moment you make a contribution, your net worth increases by the amount you save in income taxes. These tax savings come to you by simply moving money from your right pocket (where your wallet is) to your left pocket (where the money is still very much yours but where it is far more difficult to spend).
For example, if you contribute $100 to your 401(k) plan, your paycheck decreases by an amount less than $100, because of the tax savings. (If your withholdings rate is 25%, your net pay would decrease by only $75.) At the same time, the full $100 contribution amount is deposited in your 401(k) plan.
You: So my net worth increases how?
If you had not made the 401(k) contribution, you paycheck would have been $75 higher. By making the contribution, your 401(k) plan balance is now $100 higher.
You: So I gave up $75 to get $100?
Exactly. Pretty good deal, right?
You: Yes. Almost sounds to good to be true.
Perhaps – but it’s a chief benefit of a 401(k) plan.
You: Why didn’t anyone tell me this before?
Got me. But no worries. Take advantage now that you know how easy it is to save money on taxes while growing your net worth and retirement savings! Start living Beyond Paycheck to Paycheck today!
You: So let me make sure I understand. My net worth increases because I am not paying the tax on the $100 I otherwise would have to in order to receive the money as part of my paycheck. Therefore, my net worth goes up by $25 simply by making this contribution. Is that right?
Yes! Furthermore, once the money is in your retirement account, you can invest the $100 for the long term and watch it grow over the decades. It may be worth many times what you originally put in, all for a one-time $75 sacrifice.
You gotta love your left pocket!
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